Early Stage Investing As Hot As Ever, Says Norwest VC Jeff Crowe

As a member and managing partner of venture capital group Norwest Venture Partners (NVP), Jeff Crowe is well-known in the ad technology space with investments ranging from Admeld to Turn.

With several hot topics pulsing in the venture and ad tech spaces, AdExchanger reached out to Crowe to get his views.

AdExchanger: What has been the impact of the Groupon and Facebook stock market flameouts in the venture capital community? Has it given VCs pause?

JEFF CROWE: The challenges associated with the initial public market performance of companies like Facebook and Groupon have not had a big impact on early stage venture investing. The impact has been much more pronounced on late stage private investing. Both late stage private investors and public investors who previously had been willing to take a risk on private investments are certainly now more valuation sensitive and often more cautious overall. They had lackluster returns or outright paper losses in 2012 from their pre-IPO investments in hot internet companies made a year or two earlier. But early stage venture investing is somewhat more insulated from changes in public market valuations, and hot early stage deals in the broader internet sector are usually attracting just as much attention from top tier VC’s today as they have been over the past few years. Maybe the fervor has abated a little, but not much.

Where do you think the next startups will emerge in the advertising landscape? Is a data-related startup possible, for example, that might address challenges in addressing audiences online and off?

There is a real opportunity for the ever increasing use of data in online advertising. First party data and third party data can add significant value in targeting for programmatic ad buys. That said, the data business is a challenging business for a start-up. It is tough to be a broker of third party data and generate a lot of value. If a small company has somehow developed a proprietary source of first party data, that can be more interesting, but then you have the question of how to scale such a business. How much is that data worth when it is included in someone else’s ad buy? How can you break into the ad buying process to get your data inserted into the buy? How can you afford the sales and marketing to make that happen? And the questions go on and on for a company pursuing a data-only business model, which is why we are not yet seeing breakout success from start-ups with that model. So I would consider a different approach here: if a start-up had proprietary first party data that provided some unique targeting advantage, I would think about using that data to buy media on behalf of clients. While a media business model would not have the same gross margins as a data only business, it would be much easier to scale quickly into a large company. And if the data provided truly proprietary targeting advantages, the company could create real value in the ad buying process.

Facebook's marketing partners seem to have transitioned a bit from smaller API partners to Facebook Exchange retargeters. What's going on there in your opinion? Any macro trends that you see?

A year ago, brands and agencies were throwing money at Facebook API partners because Facebook was the shiny new object for advertisers, and experimental dollars were flowing toward social advertising. Fast forward a year and the excitement is now about Facebook Exchange. That is because FBX allows advertisers to find their audiences on Facebook at scale, using the same large scale technologies and partners that the advertisers were already working with – vendors like Turn. So it is easier and more efficient for advertisers to get large reach using FBX. And the ROI of advertising through FBX is also very high.

The larger scale trend here is that advertisers are trying to find their audiences online wherever they exist, but on a coordinated basis. More and more, advertisers and agencies are locating their audiences and executing campaigns that cut across multiple media, multiple devices and multiple geographies – and all at scale. So a campaign today can be any combination of display, mobile, video, and social. The growing use of FBX makes the social piece of that campaign much easier to execute and therefore more likely to be included in the overall ad buy.

There has been some talk about the "coming consolidation" in ad tech. Yet, ad tech and related companies are also talking "IPO." Do you expect a serious trend toward either in the next 12 to 18 months?

Word on the street is that there are a number of ad tech companies looking to go public in the next 12 to 18 months. I won’t name specific names, but there are companies from the retargeting, video and DSP sectors who are rumored to have selected investment bankers or to be conducting banker bakeoffs in upcoming weeks. If this is the case, if all goes well with their filing processes with the SEC, and if the public markets stay receptive to IPOs over the course of the year, then you could expect to see the IPOs hitting the market by the summer or early fall. It will be interesting to see how successful these IPOs are and how the companies perform in the aftermarket. If the companies that go out are top quality names and their IPOs do well, that will be good news for the entire sector. On the other hand, if some ad tech companies try to rush out before they are ready and their stories are poorly received by public investors, that won't help anyone.